Know when to fold ‘em

It’s been a good few weeks in the markets for HUBB clients. During the September Trading key session 2, we focused on picking a couple of Elliott Wave 4 trades using our simple checklist. The two results were Ansell and Bank of Queensland. I did actually write up the Ansell trade in an article which you can now search for within your software – just use my name and ANN.ASX as the filters and you’ll find it easily. Of course, picking a trade using Elliott Wave combined with other elements of technical analysis is one thing, but knowing when to take that trade off is an entirely different issue.

Both set ups were approached in the same fashion, with extra multiple entry confirmations required (along with the Elliott Break Out Trigger or EBOT) before the positions were opened. The initial price targets were very clearly set out (primarily the most conservative time and price projections or TAPPs) but also using the range projector (RP) as a secondary forecast. The basic charts at time of entry were as below:

As ever there are two possible circumstances which can result in the exit from a position. Primarily there is the occasion of a stop loss being triggered, whether this is an initial or trailing stop loss is irrelevant. Secondarily, there is the occasion of a profit target being achieved.

For the two trades in question an initial stop was placed below the Wave Four lows and a volatility based stop was used for the progressive trailing. This volatility stop was based upon the ‘plain vanilla’ average true range (ATR) trailing stop within ProfitSource, however the multiple of ATR to be used was arrived at using a pre-calculated process that looks at Volex and previous share price volatility.

As you can see, the trailing stops were never triggered and the price moved within the TAPP target area. This obviously means the trade was a success and it’s time to take profits. Or is it? Should the profit be booked and a new trade sought or rather should you continue to trail stops and aim to lock in a continuation of the trend? Should you continue to play your hand or fold?

This will depend largely upon the trader and the trading plan that has been written down. In both instances I have still maintained open positions on these two stocks, and I intend to until I am either stopped out or the price moves above the higher of the TAPP price targets. As a market progresses further away from your initial entry point you are, by default, getting closer to the end of the trend and therefore closer to the next pull back. Subsequently, should the price move into an area of over extension, my trading plan is to take a profit on half of the position, yet remain in the trade in order to lock in any further upside. That way I have the ability to lock in profits, yet do not exit too early from a bullish trend. A simple plan, and one that anyone can utilise.